Non-stop to Saltillo.

Continental Airlines aggressively pursues business traffic from the United States to Mexico's mid-sized industrial centers.

WHEN PETE GARCIA TRAVELS TO MID-sized Mexican cities such as Puebla, San Luis Potosi and Aguascalientes, governors, state economic and tourism officials and local corporate executives roll out the red carpet for him. But the 45-year-old is not a big politico, foreign dignitary or movie star; he's a staff vice president in charge of sales and marketing for Mexico at Houston-based Continental Airlines. The warm greetings seek to woo the airline executive into adding these Mexican cities to a growing list of destinations with direct flights to and from the United States. "They come out and say, 'When you start flying here, we're going to fill up your airplane"' Garcia says.

Over the last couple of years, the fifth-largest U.S. airline has embarked on a dramatic expansion of its service to Mexico, not just to big cities and tourist destinations, but also to the secondary cities surrounding the giant metropolis of Mexico City and near the country's northern border with the United States. Continental now serves 21 cities in Mexico, second only to Atlanta-based Delta Air Lines, which serves 23 cities thanks to its code-share agreement with AeroMexico. In March, Continental's number of flights to Mexico was up almost 14.5% over the same time last year, with the country accounting for 11.2% of its international revenue.

Why the emphasis on smaller cities? For one thing, Mexico is booming with industry spurred by the North American Free Trade Agreement (the country's gross domestic product zoomed 7.9% on an annual basis in the first quarter), and some of these towns have become manufacturing centers for everything from autoparts to TV sets to cell phones. Second, no airline was really serving those cities directly from the United States; executives often had to connect through Mexico City. "A lot of people don't like to fly south to go north," Garcia says.

Northern exposure. But Continental isn't serving these smaller cities with jumbo jets. It's doing so with regional jets. The company has ordered 210 such aircraft from Brazilian airplane maker Embraer (see "Flying High," LATIN TRADE, August 1999), including Embraer 145s, which seat 50 passengers, and Embraer 135s, which seat 37. It's already taken delivery of 70; the rest will be coming in monthly through 2003.

While some will be used to serve smaller U.S. cities from Continental's hubs in Houston and Cleveland, a number will be used to fly to industrial cities in Mexico. "We're taking advantage of Houston's geographical position, the capabilities of the regional jet aircraft and the growing prosperity of the northern tier of Mexico," says Barry Simon, Continental's senior vice president for international. "If our hub were in Chicago, we wouldn't be able to do it."

Analysts think Continental has the right flight plan. "They've certainly added more service to Mexico," says Brian Harris, who follows the airline for brokerage firm Salomon Smith Barney in New York. "It seems to have some logic to it".

Competitors are catching on. As part of an expansion of its code-share service with Delta last November, AeroMexico began offering flights from Houston to Villahermosa, Los Angeles to Aguascalientes and Phoenix to the high-tech center of Guadalajara, among others. And this past June, it planned to begin offering service from Los Angeles to Durango. "It's not yet our hub policy," says Harald Bomberg, senior vice president of Aero-Mexico's U.S. operations, referring to plans to coordinate flights through one airport. "But there is a strategic plan jointly with Delta to do this very soon."

Indeed, in mid-May, Delta made a huge announcement regarding the expansion of its Latin American routes, including bumped-up service to a number of Mexican cities with regional jets starting in September. Among them: three daily flights between Dallas/Ft. Worth and Mexico City; twice-daily service between Dallas/Ft. Worth and Monterrey; daily service between Dallas/Ft. Worth and Puebla; and twice-daily service between Dallas/Ft. Worth and Guadalajara and between Atlanta and Monterrey. Delta is also inaugurating a new daily non-stop flight between Atlanta and Leon. "We're going to continue to beef up this service." Jorge Fernandez, Delta's director of Latin America, says "This is a region that is very important to the airline."

Bethune's Mexican vision. Fort Worth-based American Airlines, which flies to most of the major cities and tourist destinations in Mexico, is also said to be considering a similar move, having purchased a number of Embraer and Canadian Bombardier commuter jets and with many more on order. But Miami-based spokesperson Martha Pantin wouldn't confirm it. "We never announce until we're ready to announce." she says.

Continental's Mexico strategy is something its hard-charging chief executive, Gordon Bethune, has had in mind since taking over the troubled airline in 1994. Sitting around his dining room table drinking wine with Greg Brenneman, then a consultant who is now Continental's president and chief operating officer, he hatched a plan to use Houston's geographic proximity and business ties to Mexico to offer broader service to the country as well as points farther south. "We knew we could always beat our competition trying to flow passengers down there because of our big local base." Brenneman told LATIN a few years ago.

So in the early 1990s, Continental began adding daily flights to the bigger cities, including Mexico City, Guadalajara and Monterrey. In early 1993, it had only four daily flights between Houston and Mexico City; by the end of the year, it had eight. Then came the peso devaluation, which knocked the bottom out of Mexico's economy. While it kept up its existing service for the most part, the airline cooled its jets in regard to expansion for a while, turning to other parts of Latin America for growth.

When Mexico's economic engine resumed to full throttle a few years ago, Continental again turned its sights just south of the border. Its first new city was Tampico; later it added the northern industrial towns of Chihuahua, Saltillo and Torreon. Last May, it announced the 21st Mexican city--Hermosillo, in the northern border state of Sinaloa--to its lineup; that daily flight from Houston is expected to begin this month. The airline plans to add several more markets at the end of the year and the beginning of 2001.

So far, the strategy has worked well--so well that each flight has been profitable from day one, according to Garcia. Continental's executives have been so tickled with traffic to Tampico and Chihuahua, they added a second daily flight to both cities from Houston this past June. "The idea, of course, is to make all these double-daily or triple-daily at some point." Garcia says. "The more flights a day we can offer, the market can get served that much better."

Chihuahua's Copper Canyon. Continental has also gone deeper into the country with flights. This past March, it added a daily flight to the central Mexican city of San Luis Potosi, home to U.S.-based Cummins Engines, among other manufacturers. In May, it added a daily flight from Houston to Puebla, the city just 60 miles east of Mexico City--Puebla has a number of factories, including Nokia, Purina, Rockwell and Volkswagen. In June, it added a daily flight from Houston to Aguascalientes, which is 250 miles northwest of Mexico City and has become a large export center for durable goods.

Many of the smaller, more business-oriented cities are beginning to attract tourists as well, says Garcia, indicating such draws as Chihuahua's Barranca de Cobre, or Copper Canyon, the world-famous serapes of Saltillo and the colonial architecture of Puebla. "Before, the tourism business [in these cities] focused on national domestic travel." Garcia says. "Now they can bring in international clientele, which they're extremely excited about."

Continental hasn't forgotten the rest of Latin America. Is working on a strategy that could let it offer service from Newark to the fast-growing cities of Belo Horizonte, Brazil, and Santa Cruz, Bolivia, in September and Puerto Plata, Dominican Republic, soon. It also increased its service from Newark to Santiago--which has a stop in Lima--from four times a week to daily.

The airline also hasn't forsaken the major cities and tourist destinations in Mexico. It has seven daily nonstop flights between Houston and Mexico City, two between Newark and Mexico City, four between Houston and Monterrey and three between Houston and Guadalajara. It also has good coverage of Cancun, with five daily flights from Newark and four from Houston.

But with the regional jets it has on order, Continental's sights are clearly set on business people traveling to Mexican towns off the beaten track. Indeed, some of the airports Garcia has visited don't have long-enough runways or space for an additional ticket counter. But that hasn't dampened the spirits of local boosters. "No American carriers have really ventured into these markets." Garcia says. "So they're very anxious to have a U.S. carrier come in." If it makes money for the airline, Continental is only too happy to oblige.